HM Revenue & Customs (HMRC) is set to issue a record number of unexpected bills this year, affecting more pensioners who are now ensnared in the tax system. The tax authority will send out 1.4 million simple assessments for the 2024-2025 tax year, marking an increase of 80,000 compared to the previous year’s 1.32 million. This figure is the highest ever recorded and almost double the average annual total over the past seven years.
The surge in simple assessments is driven by the freezing of income tax thresholds, pulling more pensioners into the tax net. These assessments streamline tax collection without requiring taxpayers to complete a self-assessment form, a process typically used for pensioners or workers with underpaid tax. Experts warn that these unexpected tax bills can catch pensioners off guard, with the threshold freeze expected to continue until at least 2028.
While income tax thresholds have remained stagnant despite inflation, the state pension’s “triple lock” has increased retirees’ weekly income, pushing more individuals into the tax system or higher tax brackets. Most retirees receive income from private pensions, with tax automatically deducted through their tax code. However, those without private pensions may receive a simple assessment tax bill.
HMRC data shows a significant uptick in taxpayers automatically assessed for underpaid tax over the past four years. In the 2021-2022 tax year, when income tax thresholds were frozen, HMRC issued 675,000 simple assessments, less than half the current number. The tax office issues simple assessments for straightforward calculations where there is sufficient income information. The rise in their use reflects the growing number of pensioners impacted by the tax system.
Jon Greer from Quilter mentioned that simple assessment letters are a result of stealth taxes in action due to frozen tax thresholds and higher state pensions creating more tax liabilities for older individuals. Sir Steve Webb, a former pensions minister, highlighted the increasing number of pensioners being brought into the tax net due to long-term threshold freezes, indicating a future where more retirees will navigate this process.
Separate HMRC figures reveal over 500,000 claims for overpaid tax on pension withdrawals since the introduction of “pension freedoms” rules in 2015. The rule change allowed savers to withdraw varying sums from their pensions, resulting in emergency tax rates that led to overpayments. The Treasury pledged to support pensioners with increased state pensions, ensuring dignity and respect in retirement.
By committing to the triple lock guarantee, the government aims to boost pensioners’ incomes and provide financial security for millions during this parliamentary term.